The average
loan to value ratio of closed loans broke through 80 percent in May according
to the Origination Insight Report released today by Ellie Mae. The average LTV was 81 percent, up from 80
percent in April and the highest level since Ellie Mae began tracking these
details in August of last year.

Ellie
Mae reports detail of both closed loans and denied loan applications that flow
through its mortgage management software and network and represent more than 20
percent of U.S. mortgage origination volume.

“In May, the average loan-to-value (LTV) for closed loans broke the
80% mark for the first time since our tracking began in August 2011,” said
Jonathan Corr, chief operating officer of Ellie Mae. “The increase appeared to
be driven by an easing of LTVs on conventional refinances (the average LTV was
72% in May compared to 69% in April). Last month, closed conventional refinances
with LTVs of 95%-plus jumped to 11%, up from 7.1% in April and 3.6% in March,
which may be a sign that HARP 2.0 is helping more borrowers.

At the
same time the LTV of closed loans is rising so has the LTV of denied loans,
increasing steadily from 82 percent in August to 88 percent in May while debt
to income ratios (DTI) and FICO scores have remained relatively unchanged. While more underwater borrowers have been
attracted by the publicity attending the changes in HARP apparently many have
not successfully refinanced.

To get a meaningful view of lender “pull-through,”
Ellie Mae reviewed a sampling of loan applications initiated 90 days prior
(i.e., the February applications) to calculate a closing rate for May. Ellie
Mae found that 47.2% of all applications closed in May compared to 48.1% in
April.

Refinancingrepresented 54 percent of closed loans in May, down 2 percentage points from
April. FHA loans had a 25 percent share,
down 3 points while conventional loans increased 3 points to a 65 percent
share. It took the average loan 46 days
to close, up one day from April.
Refinancing loans required an average of 48 days and purchases 44.

In
addition to the 81 percent LTV, the average closed loan in May had a FICO score
of 744, one point higher than April, and a DTI of 24/35, a number that has
remained virtually unchanged since tracking began last August. A loan that was denied had, in addition to
the 88 percent LTV, a FICO of 702, unchanged from April, and a DTI of 28/43, little
changed over the last ten months.

As might
be expected, there were substantial differences in the profiles of loans accepted
and denied by FHA and conventional lenders.
What was surprising was the additional leeway FHA lenders appear to
grant to purchasers over refinancers.

Representatives of both the Mortgage
Bankers Association (MBA) and the National Association of Home Builders (NAHB)
testified before the House Committee on Financial Services’ Subcommittee on
Insurance, Housing and Community Opportunity Thursday. The committee heard from stakeholders on the
oversight of the Federal Housing Administration’s Multifamily Insurance
Programs.

Rodrigo Lopez, President and CEO of
AmeriSphere Multifamily Finance in Omaha, Nebraska spoke on behalf of MBA. Lopez told the committee members that the
recent housing crisis had spotlighted rental housing and the critical
importance of FHA’s countercyclical role.
One in three American households lives in rental housing today, he said,
and most Americans will rent at some point in their lives.

During the recession, as other rental
market participants pulled back, FHA significantly increased its presence. Private
capital is coming back, he said, but FHA remains critical in many markets and
for many types of properties, particularly older affordable ones that other
investors are less willing to finance.

Even while FHA’s multifamily programs
have been providing critical liquidity to the market, they continue to have low
delinquency rates and show positive cash flow.
Lopez referenced a 2011 MBA study that found that FHA multifamily and
healthcare loans originated between 1992 and 2010 have generated $927 million
in positive net cash flows. New tighter underwriting standards should further
improve loan performance going forward, he said.

MBA commissioned
its study because of the lack of good data on multifamily programs from the
Department of Housing and Urban Development (HUD). What data is available, Lopez said, is
difficult to separate out from information on single family loans. “Congress should require HUD to
separate the multifamily loans from the single family loans in the GI/SRI fund
in order to provide policymakers with a better understanding of the financial
performance of the multifamily programs.”

In order
for FHA continue to sustain the housing market’s long-term vigor it needs adequate
resources to operate effectively. Lopez pointed out that over the last four
years HUD’s multifamily staff level has dropped significantly while loan volume
has increased three-fold. Technology
funding has also suffered and multifamily programs are still unable to submit
applications electronically.

Lopez
credited HUD efforts to improve its processes. FHA has initiated a pilot
program streaming applications for properties with low income housing tax credits.
MBA would like to see a nationwide expansion of the pilot as soon as possible.

Theproposed increase of mortgage insurance premiums (MIPs) for multifamily
programs seems to run counter to the strong performance of these programs and
recent tightening of underwriting standards. MBA believes any MIP increase
ought to be supported by a careful actuarial analysis and any insurance
premiums should be used only to manage risk associated with the programs. Currently any excess income is returned to
Treasury, not used to improve the programs or for a reserve fund.

Bob Nielsen, the immediate past chairman
of NAHB gave similar testimony regarding increases in MIPS. The need to raise
fees to reduce defaults has not been demonstration and HUD has failed to
provide an analysis as to how the new fees would affect borrowers, lenders, or
renters, he said. The proposed increases
will not provide a buffer against future FHA losses because there is no
segregated fund and excess income is simply returned to the U.S. Treasury each
year. Increases will only add to property owners’ costs, thereby affecting
rents and discouraging the production of rental housing.”

The effect would be felt
disproportionately by market rate properties in the secondary markets where
credit is limited, he added, because private capital is focused on the
strongest markets and the best capitalized large developers.

Turning to other topics, Nielson said NAHB opposes efforts to establish minimum
capital ratios for the General Insurance and Special Risk Insurance (GI/SRI)
Funds before an in-depth analysis is done but supports efforts to fully fund
renewals of Section 8 Project Based Rental Assistance contracts. The association also backs HUD’s efforts to
expand financing for small multifamily rental properties and to provide a
secondary market outlet for such loans.

He said that NAHB estimates that the aging “echo boom” generation
will result in demand for between 300,000 and 400,000 multifamily units per
year over the next decade. While economic recovery will determine the timing of
this demand it will not be postponed indefinitely and 2011’s 178,000
multifamily housing starts were only half what was needed to keep pace with
growing demand.

“Production of multifamily housing will undoubtedly increase above the
current low levels,” said Nielsen. “It is important that the
financing mechanisms to support that production are available and that Congress
ensures that the FHA multifamily mortgage insurance programs continue to meet
the needs of low- and moderate-income renters.”

Lopez
and Nielsen were among nine witnesses appearing before the committee. Among others were Marie Head, Deputy Assistant Secretary for FHA and representatives of
the National Housing Trust, National Low Income Housing Coalition, National
Council of State Housing Agencies and the National Multi Housing Council

The Federal Reserve Bank of New York
recently released a paper that looked at the impact of HARP revisions on loan
defaults and pricing. The paper, Payment Changes and Default Risk: the Impact
of Refinancing on Expected Credit Losses was written by Joseph Tracy and
Joshua Wright.

When the Home Affordable Refinance Program
(HARP) was initiated, its goal to stimulate the economy and reducing defaults
by lowering mortgage payments in households with high loan-to-value mortgages. These
were borrowers who were otherwise unable to refinance.

HARP was implemented in 2009 but refinancing
activity was much lower than expected.
Just over one million refinances have been done under HARP rather than
the 3 to 4 million expected. This
confirms, the authors say, the original rationale for HARP, that in the wake of
the housing bust borrowers need help refinancing.

HARPS lackluster results have provoked discussion
about the impediments to refinancing including credit risk fees, limited lender
capacity, a costly and time consuming appraisal process, limitations on
marketing, and legal risks for lenders. HARP
was recently revised to better address these impediments. .

Concerns about revising HARP included
doubts about its fairness and about macroeconomic efficiency. The Federal Housing Finance Agency (FHFA) has
a responsibility to weigh the value of any proposed changes in terms of a possible
impact on the capital of the government sponsored enterprises (GSEs). These could include a reduction in the income
generated through interest on the GSE’s Holdings of MBS, on the expected
revenues from the put-backs of guaranteed mortgages that default, and finally
on the impact of refinancing on expected credit losses to the GSE fees.

One outcome of an improved program would
be more borrowers in a position to refinance.
Estimates can be made of the average reduction in monthly mortgage
payments that would result from a refinance; the question is how this payment
reduction would affect future defaults.
Ideally a study could determine the difference in expected credit losses
from two identical borrowers with identical mortgages where one borrower
refinances and the other does not. However,
once the existing mortgage is refinanced it disappears so both
mortgage/borrower sets cannot be similarly tracked and the impact of the
payment change on a borrower’s performance must be inferred.

A recent congressional budget office
working paper estimates that reduced credit losses would produce an incremental
2.9 million refinances of agency and FHA mortgages and that such a program
would reduce expected foreclosures by 111,000 or 38 per 1000 refinances,
reducing credit losses by $3.9 billion.

Using data from Lender Processing
Services the authors selected eligible borrowers from among borrowers who had
been current on mortgage payments for at least 12 months and had estimated loan-to-value
ratios (LTV) over 80 percent. To measure motivation the authors selected loans
where the borrower could recover refinancing costs in two years. Using these parameters it was determined that
refinancing would reduce the required monthly payment by 26 percent on average.

The authors found impacts on results
from various combinations of local factors such as house prices, employment
rates, the local legal methods of handling delinquencies, and contagion risk,
i.e. the exposure of the borrower to others who had defaulted. There were also effects from FICO scores and
debt to income ratios and loan specific factors such as the purpose of the
loan, full documentation of the loan, and length of loan term. Various methods were used to control for
these variables including excluding loans from the sample.

It is acknowledged that LTV ratios have
a significant correlation with default and the authors did test and confirm
this relationship. The next step was to estimate the impact of a
26 percent payment reduction on the average default rate. The authors used estimated ARM default and
prepayment hazards to do a five-year cumulative default forecast holding the
local employment rate and home prices stable.
At five years the models imply that the expected cumulative default rate
would be 17.3 percent. When the payments are reduced by 26 percent the expected
default rate is reduced to 13 percent a 24.8 percent reduction. The same analysis was run for borrowers with
prime conforming fixed-rate mortgages obtaining a cumulative default rate of
15.2 percent which refinancing reduced to 11.4 percent, a decline of 3.8
percentage points.

These figures were used to conduct a
simple pricing exercise to measure the difference between a refinancing fee
that maximizes fee income for a certain category of borrowers and a fee that
maximizes the combination of the fee income and the reduction in the expected
future credit losses using the GSE pricing categories for their loan level adjustments. It was found that FICO score strongly impacted
both payment reductions and default rates ultimately resulting in reductions in
the default rate of 1.9 percentage points for a high FICO borrower and 9.1
points for a low one. This implies that
incorporating the impact of expected credit losses into the pricing decision
should generate higher price discounts for weaker credit borrowers as measured
by FICO score and LTV.

The authors found that incorporating the
impact of expected credit losses after refinancing on average lowed the desired
pricing by 17 basis points. Looking at
the averages by LTV intervals shows an impact of 15 basis points for mortgages
with a current LTV of 80 to 85 and increases to 14 basis points for mortgages
with a current LTV of 105 or higher.
Basing fees on FICO scores involves a much more complicated set of
factors.

The authors conclude that the average
HARP refinance would result in an estimated 3.8 percent lower default
rate. Assuming a conservative average
loss-given default of 35.2 this indicates an expected reduction in future
credit losses of 134 basis points of a refinanced loan’s balance.

The paper concludes that the impact
of refinancing on future default risk is important to the current debate of the
GSE fee structure for HARP loans. “These
results suggest that refinancing can be fruitfully employed as a tool for loss
mitigation by investors and lenders. The
optimal refinance fee will be lower if this reduction in credit losses is
recognized.” Reducing fees, the authors
say, will increase incentives to refinance but at the cost of fee income to the
GSEs. “Our analysis shows, however, that
there is an offset to this lower fee income today which is lower credit losses
in the future.”

The new version of HARP, the Home Affordable Refinance Program, appears to be gaining in popularity judging by the quarterly figures rolled out today by the Federal Housing Finance Agency. According to its March 2012 Refinance Report more than 180,000 homeowners refinanced through HARP 2.0 in the first quarter of 2011 compared to about 93,000 in the fourth quarter of 2011. HARP 2.0 is only available to homeowners who have mortgages that are owned or guaranteed by Fannie Mae or Freddie Mac.

The Refinance Report covers all refinancing activity by Fannie Mae and Freddie Mac. Overall refinancing volume surged during the first quarter as interest rates continued to drop, week after week, to new historic lows. The two companies refinanced a total of 1,178,419 mortgages in the first quarter compared to 1,029,610 refinances in the fourth quarter of 2012 and slightly fewer numbers in the first quarter of 2011. Fannie Mae originated 761,922 of the first quarter total and Freddie Mac 416,497.

HARP has been around since the first quarter of 2009, established to assist homeowners to refinance even if the value of their home had slipped below loan-to-value underwriting standards. HARP originally had a LTV ratio limit of 105 percent, raised to 125 percent later in the year. The program reached far fewer borrowers than the program’s designers had anticipated. During the 11 quarters that the original program was available it exceeded 100,000 loans in only three, peaking at 142 thousand in Q4 2010.

Enhancements to HARP were announced last fall and rolled out in January. The changes included completely eliminating the loan-to-value (LTV) ceiling for borrowers who chose fixed-rate loans and the elimination or lowering of fees for some borrowers. The enhanced program is commonly referred to at HARP 2.0.

Of the 180,185 HARP loans closed during the quarter, 94,901 were with Fannie Mae and 85,284 with Freddie Mac. The majority of the loans, 138,893, have LTV’s between 80 and 105 percent; about 37,000 have ratios between 105 and 125 percent. Only a handful (4,434) are loans that are truly underwater with LTVs exceeding 125 percent but over half of these were in three states, California, Florida, and Arizona. Loans with LTVs over 105 percent had the greatest percentage increase, nearly tripling (13,000 to 37,000) from the fourth quarter of 2011 to the first quarter of 2012. Both Freddie and Fannie saw similar rates of increase.

There were over 211,000 Streamlined Refis during the quarter; 144,300 through Fannie Mae and 66,800 through Freddie Mac.

The performance of FHA loans dominates the April Mortgage Monitor report released Thursday by Lender Processing Services (LPS). While GSE and private loans saw significant drops in foreclosure starts and portfolio loans trended down slightly, foreclosure starts for FHA loans soared, jumping 73 percent in April. While all 2005+ vintages of FHA loans had increased numbers of starts, the increases for loans originated in 2008 and 2009 were dramatic.

“In 2008, when the loan origination market virtually dried up, the FHA stepped in to fill the void,” explained Herb Blecher, senior vice president for LPS Applied Analytics. “FHA originations tripled that year, and increased to five times historical averages in 2009. High volumes like that, even with low default rates, can produce larger numbers of foreclosure starts. That represents a lot of loans to work through – the 2008 vintage alone represents some $14 billion of unpaid balances in foreclosure, and the overall FHA foreclosure inventory continues to rise.”

Despite the increase in every vintage, loans originated for FHA after 2009 are performing distinctly better. At the two year mark the delinquency rate for the 2010 vintage is 0.4 percent compared to 1.3 percent for loans originated in 2006 and 1.8 percent for the Class of 2007.

Nationally there were 181,584 foreclosure starts recorded during April compared to 186,446 in March and 187,323 one year earlier. The national pre-foreclosure sale rate (foreclosure inventory) was 4.14 percent, exactly the same as in March and in April 2011. There is still a tremendous difference between the inventory in non-judicial states (2.46 percent) and that in judicial states (6.50 percent.) The inventory for GSE, private, and portfolio loans decreased slightly during the month but those improvements were offset by a sharp jump in the FHA foreclosure inventory driven in turn by the jump in foreclosure starts.

Foreclosure sales continue to decrease, down 2.6 percent from March. Sales were down 2.0 percent in non-judicial states while those in judicial states were largely unchanged. Even those states that saw increases in foreclosure sales saw only incremental increases in terms of real numbers, and all were still far below pre-moratoria levels.

The delinquency rate in April was 7.12 percent, up slightly from 7.09 in March but well below the 7.97 percent rate a year earlier. The rate of seriously delinquent loans and loans in foreclosure decreased to 7.37 percent from 7.44 percent. In April 2011 the rate was 7.86 percent. This decrease masks the fact that the age of the delinquent loan inventory continues to increase.

On the loan origination front, LPS reported that activity was up for the second straight month and was the highest in four months. Non-FHA originations rose from 27.3 percent of originations in March to 30.2 percent in April and the volume of non-FHA loans with loan-to-value ratios higher than 80 percent increased from 112,000 in March to 128,000 in April. Both increases were noted by LPS as “signs of HARP.”